Hair Oil to Appliance Makers in India See Tax Pain LingeringBy and
Sales at Colgate-Palmolive India, Emami hurt by tax overhaul
Replenishment of inventories to help sales: Raiffeisen Capital
Companies from Marico Ltd. to V-Guard Industries Ltd. see sales remaining weak for a few months after India introduced a nationwide tax disrupting supplies and prompting stores to focus on cutting inventories.
There were “significant disruptions” of supplies in the three months ended June and lost sales will be recouped in the next couple of quarters, said Mithun K. Chittilappilly, managing director of electrical products manufacturer V-Guard. Marico, which makes Parachute hair oil, said it expects the impact from the transition to the goods and services tax to be “short lived and business should come back to normalcy in subsequent quarters.”
Sales of consumer goods makers including Marico and Emami Ltd. fell in the quarter through June and lagged behind analyst estimates as inventories were cut ahead of the implementation of the uniform tax regime last month crimping consumption that was already reeling from a ban on higher-denomination currency. Companies like toothpaste maker Colgate-Palmolive India Ltd. and soap manufacturer Godrej Consumer Products Ltd. said sales in the quarter were impacted by the tax overhaul.
“There is hope that earnings will improve in the next quarter,” Juergen Maier, a Vienna-based fund manager at Raiffeisen Capital Management, said in a phone interview. “Quarterly numbers were negative especially on the consumer side with the impact of de-stocking, however, restocking in July and August will have some positive impact on sales in September quarter as people get used to the GST regime.”
Shares of Marico declined 1.5 percent, V-Guard fell 0.5 percent, Emami dropped 1 percent and Godrej Consumer slid 1.8 percent as of 9:29 a.m. in Mumbai. The benchmark S&P BSE Sensex declined 0.1 percent.
Prime Minister Narendra Modi’s reform has seen a spiderweb of taxes and levies that varied state-by-state replaced with nationwide rates. On the first day of its implementation, many shops were closed and consumers stayed away in droves, deterred by the change in prices and uncertainty over how the tax would work. Businesses have also been grappling with GST’s complicated structure, which includes four tax slabs ranging from 5 percent to 28 percent as well as numerous exemptions.
“Due to uncertainty about the new law, the trade in India was cautious, and shipments basically ground to a halt for the last two weeks of June,” John Faucher, senior vice president of Colgate-Palmolive Co., said on a call with analysts on July 21.
While India’s economy is growing at a world-beating pace, underlying slack at factories and anemic loan growth could slow expansion.
Indian factories were running at about 74 percent of capacity October-December, business sentiment in manufacturing worsened April-June, consumer confidence dipped in June, and more households expect prices to rise after a record-low 1.5 percent reading in June, according to surveys conducted by the central bank, which cut its key interest rate on Wednesday. The Nikkei India Composite PMI Output Index in July posted its steepest drop since March 2009, a report showed Thursday.
Still, company executives such as Mohan Goenka, a director at skincare products manufacturer Emami, expect sales to rebound over the course of the current financial year through March. And consumer demand remains robust, according to Nisaba Godrej, executive chairperson of Godrej Consumer Products, the maker of soaps and hair color which posted its slowest pace of revenue growth in five quarters.
“We expect the situation to normalize during the course of the second quarter, as the channel adapts to the new tax system,” said Godrej. “And look forward to stronger growth in the second half of the year.”